Follow the money

A 10% change in hogs is not the same as a 10% change in grain pricing when it comes to impacting profitability.

Joseph Kerns

May 20, 2024

3 Min Read
National Pork Board

The impact of human nature can’t be ignored when it comes to trading in commodity markets. Our brains to want to be “right” and we seek data to support our then-current thinking. We have all done this on logical things — it rained in July, the price of corn should come down — and illogical things —the Vikings are better than the Bears. We generally gravitate toward data that supports our bias and that is a very efficient use of mental energy as it allows us to explain cause and effect, even if the evidence of such is sketchy. A disciplined trader is more comfortable existing in the realm of “I don’t know why that happened,” which is less palatable and more appropriately aligned with a scientific method. 

I offer that first paragraph as a backdrop to our current market that is firmly impacted by influences of something other than fundamental facts, we are in a money-flow market and you have to look beyond supply/demand economics to explain price movement. Let's start with the grain sector. The next two charts show the recent buying interest (a mitigation of their shorts) from the managed money community. I would further offer that the impetus of this reversal has little to do with planting progress or anything agronomically related. 

It would seem that the more dovish approach by the Fed has brought buying into both equities and commodities which has resulted in a spike in our input prices and a Dow Jones that recently closed above 40,000 for the first time ever. Markets have a tendency to remain illogical longer than some can remain solvent — that is their nature. I would offer that the fundamentals of production relative to demand will have to be reconciled at some point and the current planting progress combined with weather forecast is favorable for good yields. I am not a fan of buying corn or soybean meal at today’s levels. 

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Turning our focus to hogs, the attached charts depict this scenario for our revenue item and the trend is not in favor of the pork producer. Note that managed money spent the first four months of the year adding to their long position which corresponds to the appreciation in prices for the same time period. For the past 30 days, they have been reducing their long (selling) which correlates with a swoon in values. The chart with the green lines represents the trade in the June hog contract. 

What has changed fundamentally during this timeframe? Not much. Our supply of animals has been generally consistent with the recent Hogs and Pigs report numbers, our exports have been good, domestic demand may be slipping a bit but certainly not enough to justify the price decline. This one, in my opinion, falls firmly in the realm of money flow and producers that can afford to be patient before seeking coverage should do so. 

Finally, remember that our industry is characterized by an asymmetrical skew – a 10% change in hogs is not the same as a 10% change in grain pricing when it comes to the impact to our profitability. We have a heavy bias to the revenue side whereas favorable hog prices can cover a myriad of sins across the balance of our operations. In other words, if you have to get one thing “right” in your marketing, a high price for hogs is the #1 indicator of profits.

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Comments in this article are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals. Contact Kerns at [email protected]             

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